"Developing a new risk paradigm” is an excellent article written in today’s ET by TK Arun. A must read for those who want to understand the play of subprime crisis on developing countries’ economies.
It gives an excellent explanation of how the crisis started.
· The subprime crisis started with lenders in the
· These unviable loans do not stay on the books of the lenders for long. They are securitised and sold off to other investors in various esoteric combinations. How risky these instruments were, the investors didn’t have a clue — they chose to swallow the triple A rating the credit rating agencies gave them and bought them up by the tonne anyway.
Some other questions that are answered in straight-forward manner by this article include the following.
What adverse affects were played out by the subprime crisis?
· When interest rates went up, as the Fed raised rates to combat inflation, default on these loans began. Worse, fears of large-scale default began to mount. And defaults on loans lead to mortgage foreclosures, bringing houses on to the market.
· House prices have not just stopped soaring in the
What is a ‘flight to safety’ manoeuvre undertaken by FIIs and how does it hurt countries like
· When this perception of risk goes up, lending freezes up, throwing sand into the economy’s machinery. Further, funds undertake a manoeuvre called flight to safety. This is where developing economies like
· The other source of disruption is construction-led slowdown in the
You may also be interested in looking at what we noted on the subject earlier on: